Market Place; Honeywell Torn Between Deal and Independence

By CLAUDIA H. DEUTSCH

Published: June 21, 2001

Earlier this year, Honeywell International's chairman, Michael R. Bonsignore, expressed confidence that his company's efforts to integrate with the General Electric Company would pay off quickly once the deal was completed.

The merger of the two companies, of course, seems to be unraveling because of opposition from European regulators. Honeywell would almost certainly remain a takeover target, but there might well be a long period where it must go it alone. And the efforts it has made to merge with G.E., while hurting it in the short run, could make it stronger in the long term.

''Honeywell has real businesses and assets that if well managed can still deliver nice returns,'' said Timothy M. Ghriskey, a senior portfolio manager of the Dreyfus Corporation, whose funds hold both G.E. and Honeywell shares.

But creditors are not so sanguine. Moody's has said it may downgrade Honeywell's credit rating if the company remains independent. And Carol Levenson, editor of the investor newsletter Gimme Credit, is telling bondholders to avoid Honeywell. ''Almost all scenarios leave it a weaker credit than it was before its dalliance with G.E.,'' she said.

The European Commission is unlikely to block the G.E. deal officially until July, but it has already distributed a draft decision outlining its proposed rejection. And while G.E. has not withdrawn its bid, many analysts say that is mainly a tactic to prevent Honeywell shareholders from suing G.E. for abandoning the deal.

In fact, Guy P. Wyser-Pratte, a well-known speculator in takeover stocks and a Honeywell shareholder, sent a letter to Honeywell and G.E. yesterday suggesting that G.E. threw in the towel too soon and was in violation of the merger agreement.

No one doubts that Honeywell, which had $25 billion in revenue last year, can survive the breakup of the deal. Its chemicals, thermostats and other cyclical businesses have fallen prey to the softening economy. But its aerospace businesses, which provide 40 percent of its revenue and more than half of its profits, are strong. And it has promised to cut jobs and other costs to the tune of $650 million in annual savings.

Shares of Honeywell fell $1.46 yesterday, to $37.04, well below the $56 they reached on news of the G.E. deal but above the price before the deal was announced. And while many analysts recently lowered their earnings estimates for the year -- the Thomson Financial/First Call consensus is that Honeywell will earn $2.65 a share, down from predictions of $2.70 last month -- most still rate Honeywell a strong buy.

''They've probably wasted time and money making their information technology systems compatible with G.E.'s, but their factories, sales force and distribution network are still intact,'' said David Bleustein, an analyst at UBS Warburg.

Still, most analysts agree that Honeywell continues to trade as a takeover target. Some think G.E. and the European Union may come to terms, particularly because European companies like Rolls-Royce might be eager to buy the Honeywell aerospace assets that G.E. would have to shed.

Others think that the United Technologies Corporation, which had been planning to buy Honeywell before G.E. made its pre-emptive bid, will renew its interest.

''Honeywell's stock will trade higher than normal unless United Technologies says it is not interested,'' said Tom Burnett, president of Merger Insight, a research firm.

But, while that kind of speculation has gone on for a while, analysts are also accepting that Honeywell might have to go it alone. And not everyone likes the picture that poses.

''They were missing their growth targets well before the economy started to tank,'' said Robert Friedman, an analyst with Standard & Poor's. ''If they hadn't been distracted by the merger, they could have divested lackluster businesses and put in a better management team.''

Indeed, Mr. Bonsignore may be walking on eggshells. John F. Welch Jr., G.E.'s chairman who is retiring soon, and Jeffrey R. Immelt, G.E.'s chairman-elect, have both stated publicly that the deal is all but dead. Mr. Bonsignore has kept quiet. But on Monday, Honeywell's board issued a statement reaffirming Honeywell's commitment to the merger.

Some saw the board's action as a slap at Mr. Bonsignore. ''Why else would the statement not come from the C.E.O.?'' one analyst asked. An executive at a company that competes with Honeywell shared the skepticism. ''The C.E.O. is the chief spokesman,'' he said, ''and when a board issues statements itself, it's showing a lack of confidence in the C.E.O.''

But a person close to Mr. Bonsignore insists that his position is secure. ''The board was telling the Europeans that if they hold in their objections to the deal, they will do egregious damage to Honeywell,'' the person said. ''That is more forceful as a board statement than as the rantings of a frustrated C.E.O.''

Egregious damage might be an overstatement. In fact, in some ways, Honeywell is stronger for the botched merger. Many analysts say that Honeywell, itself a product of a 1999 merger between Honeywell Inc. and the Allied Signal Corporation, has never merged those two cultures into a seamless whole. They say that nine months under the G.E. microscope has made Honeywell a leaner, meaner company.

''There's a good chance that G.E. has already encouraged them to write off obsolete assets, take restructuring charges and end unprofitable customer relationships,'' said Mr. Ghriskey of Dreyfus.

Moreover, Honeywell has for some time wanted to sell its friction materials, automotive consumer products and security monitoring units, all of which have dragged its profits down. But as soon as the merger machinery began grinding, Honeywell was constrained by pooling-of- interest rules from selling those assets. Those constraints would die with the G.E. deal. Any future acquirers would most likely wait until the lackluster businesses are gone.

Still, Honeywell has not come through this year unscathed. ''There's little question that Honeywell is filled with demotivated and disspirited people right now,'' said Christopher A. Bartlett, a professor of business administration at the Harvard Business School.

There has been no mass exodus of crucial executives. But analysts worry that many were focusing on personal postmerger prospects or on reshaping Honeywell as a component of G.E. They worry that Honeywell managers paid little attention to calculating next year's operating budgets or setting short-term strategies.

Moreover, the same G.E. scrutiny that may have whipped Honeywell into shape may drive other potential suitors away. ''The G.E. audit staff has learned everything about Honeywell's costs and pricing strategies,'' the executive at Honeywell's rival said. ''That would give G.E. a huge advantage against the company that buys Honeywell.''

So, what is the prognosis for Honeywell? Mixed. The consensus is that, while its best option is to merge, it could still be a vibrant company on its own.

''Its clothing may be tattered and torn,'' Mr. Bleustein said, ''but its organizational bones are still strong.''